If you did any amount of discretionary shopping in recent years, chances are, you did it through Amazon (NASDAQ:AMZN). The e-commerce giant has single-handedly sparked a paradigm shift in the consumer market, in turn, it has sunk multiple retail stocks. So dominant is the company that market observers have coined the term “Amazon effect.”
The meaning is self-explanatory. But to put into statistical terms, consider that last year, e-commerce was responsible for 10% of all U.S. retail sales. Of that slice of the big pie, Amazon took home 43% market share. Just as impressive, the company wins with all income demographics. Sure, they’ve cornered the affluent, but they’ve also upsold middle-class income earners with their Prime memberships.
The Amazon effect isn’t just about sector dominance, but it also refers to their broader ambitions. Amazon stole headlines when it bought out Whole Foods Market, sending shivers to retail stocks specializing in groceries. Plying their trade with a hunger characteristic of an upstart firm, AMZN is also eyeing the healthcare market.
Given this overwhelming supremacy, it seems foolish to even think about gambling on retail stocks. However, contrarians should take heart: the Amazon effect, though intimidating, has its limitations. Consumers aren’t always prone to online transactions, especially for certain products. And some products, as I’ll discuss later, don’t fit well into the AMZN business model.
It’s a risky road, make no mistake. However, if you’re feeling adventurous, here are seven retail stocks closing the Amazon gap.
Retail Stocks Closing the Amazon Gap: Home Depot (HD)
It’s not that Amazon doesn’t sell home-improvement tools and supplies; they actually have a surprisingly wide selection of products. But let’s get real, folks. You’re not going to do your home-improvement shopping on Amazon. Instead, you’re going to head off to your local Home Depot (NYSE:HD) store.
Typically, when renovating your home, you need supplies right now. Unless Amazon finds a way to deliver products instantly, all physical retail stores have this capacity as a precious advantage. Moreover, these projects necessitate that you see firsthand what you’re buying. Sometimes, that specific shade of blue looks different in person than it does on a computer screen.
HD stock’s performance represents this nullification of the Amazon effect well. Shares are up 7.5% year-to-date despite a difficult market situation. Last year, HD brought shareholders a monster 43.5% return. Over the long run, investors can expect further outperformance.
Fundamentally, Home Depot’s profitability margins outrank most competitors in its sector. Over the last three years, the company averages double-digit revenue growth. That’s going to slow down a bit as the sector becomes saturated. Still, it maintains consistent demand, which isn’t going to go away anytime soon.
Retail Stocks Closing the Amazon Gap: Gap (GPS)
Among retail stocks, you’d imagine that apparel stores have a natural moat against Amazon’s aggression. Personally speaking, one of the challenges of shopping for clothes online is sizing. It’s completely arbitrary. A size “M” can mean different things to different manufacturers. And while most e-commerce sites offer a refund policy, who wants the hassle?
Yet clothing stores have been hit hard, largely due to evolving fashion trends. Case in point is Gap (NYSE:GPS). The once-iconic retailer used be the “it” place to go. But as the youth market shifted from Generation X to Gen Y, GPS was caught flat-footed. They didn’t understand their key demographic, and that has cost them.
Still, GPS stock has generally enjoyed a resurgence after hitting a multi-year low in late spring of 2016. This recovery has fundamental backing, with a key metric being their operating and net margins: it’s well above average for the global-apparel industry.
Admittedly, Gap’s respectable financials stem from their Old Navy and Athleta brands. However, sparking new life into the company’s namesake brand is a big opportunity for a hungry executive. It’s not a far-shot by any means, as Abercrombie & Fitch (NYSE:ANF) and American Eagle (NYSE:AEO) have produced robust recoveries of their own.
Retail Stocks Closing the Amazon Gap: Walmart (WMT)
Some might believe that big-box retail stocks would be among AMZN’s first victims. After all, the e-commerce company offers almost every product on its platform, but with the convenience of never leaving home. With enhanced and cheaper shipping options, there’s never been a better time to be an Amazon shopaholic.
However, a few big-box retailers have recently put on a surprisingly robust performance. For instance, Target (NYSE:TGT) shares have jumped over 21% year-to-date. Membership-only warehouse club Costco (NASDAQ:COST) is also up a healthy 17.5% over the same timeframe.
So why have these names survived in the era of Amazon.com? Primarily, big-box retailers have adapted to the times to offer a comprehensive shopping solution. Earlier this decade, Target moved into the fresh groceries sector. Today, groceries represent approximately 22% of total revenue.
But if you want to take a shot on big-box retail stocks, I’d recommend Target’s main rival Walmart (NYSE:WMT). From a technical perspective, TGT appears to be overbought. Shares have struggled for traction since mid-June.
On the flipside, WMT shares are down nearly 11% YTD, but have recently started to trek back up.
Retail Stocks Closing the Amazon Gap: Best Buy (BBY)
Best Buy (NYSE:BBY) is distinct among retail stocks in that the company shouldn’t exist. This is the type of business that Amazon has utterly destroyed in the past. Once proud consumer-electronics giants like Circuit City or CompUSA couldn’t figure out the e-commerce juggernaut.
I know this firsthand. When I used to work as a business analyst for Sony (NYSE:SNE), we had to account for a growing trend of customers using brick-and-mortars as a physical showpiece. Later, they’d go home and buy their desired product on Amazon.
Consumers consistently victimized Best Buy with this tactic during my time at Sony. So personally, I’m proud for them that management revamped their entire business. Although the “showpiece practice” will never go away, BBY created a compelling consumer experience. Their mobile business is a particular strong suit, and because they have everything under one roof, shoppers more often than not open their wallets.
I also love how management attempts to find new avenues for sales growth. Last year, I featured the retailer’s foray into senior-living solutions. As I recently mentioned in another InvestorPlace article, the assisted-care industry will be huge due to simple, demographic realities.
Best Buy recognized this trend, and worked towards a win-win solution. In doing so, they told Amazon to take a hike.
Retail Stocks Closing the Amazon Gap: Big 5 Sporting Goods (BGFV)
We’ve previously explored industries, such as fashion and apparel, where Amazon has a competitive disadvantage. Other sectors, such as groceries, just don’t work well with the e-commerce platform. But what about products that Amazon legally cannot participate in?
My good friend and fellow InvestorPlace contributor Will Ashworth discovered firsthand America’s love affair with firearms. Obviously, guns are a contentious and controversial subject, meaning that not all Americans favor them. But those who do, do so vigorously and aggressively. Even having an opposing view rankles many hardcore gun proponents — just ask Ashworth.
But I think firearms-related investments like Big 5 Sporting Goods (NASDAQ:BGFV) offer individuals a chance to practice financial agnosticism. Too often, we let our politics or our emotions cloud our judgment, preventing us from seeing viable opportunities.
Now, I’m not saying that BGFV is a no-brainer investment. This is a company whose share price has gyrated from euphoria to despair, and back again.
But if you’re looking for a retailer that Amazon can’t destroy, Big 5 is it. Remember, we live in a country that has more guns than people. Logically, this means that those who buy guns, buy multiple guns. That also leads to necessary auxiliary sales, such as ammunition.
You may not like it, but given our firearms culture, BGFV is a retail moat.
Retail Stocks Closing the Amazon Gap: Ulta Beauty (ULTA)
Unlike firearms, Amazon has no legal barriers to enter the beauty market. However, it faces so many challenges that a legal barrier might as well exist.
Obviously, I’m not a woman so I can’t speak from my own experiences. But from my observations, beauty is a very personal industry. You can’t just have a standard pink color. No, there has to be a myriad of options, and of course, prospective buyers must sample them all.
This is a business model that doesn’t fit well with Amazon’s online-sales platform, but it fits perfectly with Ulta Beauty’s (NASDAQ:ULTA) brick-and-mortar enterprise. Sure, you might find some products being sold cheaper at Amazon, but that doesn’t worry Ulta. For this market outperformer, it’s not just about selling products but an experience.
Shoppers have a dazzling array of options, with several avenues to try before you buy. In other words, the risk of buyer’s remorse is limited. And for the waiting gentleman, Ulta offers several hair products for men as well.
Better yet, ULTA stock consistently outperforms benchmark indices. Shares are up nearly 14% YTD, recovering from last year’s uncharacteristically disappointing run. But given its track history, ULTA likely has many years of Amazon-resistant growth ahead.
Retail Stocks Closing the Amazon Gap: Williams-Sonoma (WSM)
Amazon has unquestionably hurt retail stocks related to the department-store industry. Foot traffic has steadily declined over the years, and notably during key holiday seasons. According to Forbes, department stores “rely on foot traffic for well over 80% of sales.”
Since Williams-Sonoma (NYSE:WSM) stores are invariably located in trendy shopping malls, you’d think WSM is a big risk. While retail stocks in general are risky due to the e-commerce revolution, WSM isn’t unusually so compared to the competition. Indeed, Williams-Sonoma might be a hidden, longer-term gem.
For starters, the company focuses on affluent customers, and they in turn love WSM’s exclusive, higher-end products. Williams-Sonoma also owns Pottery Barn, which essentially acts as a fighter brand to sway middle-class buyers.
More importantly, management has been successful beating Amazon at their own game. Currently, over half of total revenue is from their e-commerce channels, which indicates strong brand loyalty. As confirmation, Williams-Sonoma recently enjoyed a blowout earnings performance in which the company also raised guidance.
On a YTD basis, WSM stock is up 18.5%. However, one gets the impression that the markets are largely discounting the retailer’s true potential.
As of this writing, Josh Enomoto is long SNE.
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